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Newsletter - Restructuring - July 2014 - Supreme Court ruling of March 3, 2014, no.º 77/2014: Effects on the guarantee of the amendment of the secured obligation not authorized by the guarantor

The extension of the term for the delivery of works not authorized by the guarantor that had secured the penalty for delay does not harm it and, therefore, the guarantee is not extinguished; any increase in the penalty agreed does not extinguish the guarantee, but cannot be enforceable on the guarantor that will be liable in the terms agreed in the initial agreement. This decision discussed the effects on the guarantee of the novation of the secured obligation agreed without the guarantor’s knowledge. Specifically, this referred to a first- demand bank guarantee granted by a financial institution to cover any liability from construction defects or from any delay in the delivery of the work. In the construction agreement, a 22-month period was agreed for their completion, and a penalty of €10,000 was established per day for any delays attributable to the construction company. This agreement was subject to a subsequent amendment according to which the term for the delivery of works was extended and the penalty agreed increased to €20,000 per day, without the guarantor being informed of these new terms. The works were completed with a delay of over three months, the reason for which the guarantee was executed. The financial institution refused to pay the amounts claimed and filed a claim for an ordinary proceeding, arguing that it had not consented to the novation of the agreement and that, under article 1851 CC 6 , the guarantee had been extinguished with the novation. The court of first instance recognized this. However, the provincial court of appeals revoked its judgment, considering that establishing a new expiry date for the obligation and changing the penalty for delay did not mean the guarantor was obliged to anything more than for which it had endorsed the guarantee, but rather that the change to the delivery date was actually of advantage to it.

Regarding the mentioned precept, on which the appeal was based, the Supreme Court indicates that its ratio is to protect the guarantor from any damage it might suffer if the extension is granted to the debtor. This protection should be made clear when the extension lengthens the uncertainty and worsens the debtor’s financial situation, which would greatly hinder the way back for the guarantor that has paid in its name. However, in the case being judged, this circumstance was not met, because the risk of having to pay the guarantee did not apply during the period running from the delivery date initially agreed and that agreed after the amendment. The granting of a new deadline for the delivery of the works did not affect any possible subrogating solution in the event of the payment of the guarantee once the length of the delay had been established.

Regarding the increase in the amount established as a penalty, the Supreme Court recalled that a change to the terms of the main obligation did not extinguish the guarantee, even if the guarantor can only be asked to fulfil in the terms initially agreed, unless the change affects the fulfilment period and article 1851 CC is applicable. Therefore, the amount agreed as a penalty after the novation of the agreement, as the guarantor did not know or accept this, is not applicable to it and, as a result, it will only be liable in the terms of the initial secured obligation, i.e., applying the penalty of €10,000 per day of delay.

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